ECN 340 Lecture Notes - Rationality, Vacuum Cleaner, Opportunity Cost

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Published on 16 Apr 2013
Ryerson University
ECN 340
Meaning of economics
A thought process or the unique manner in which we approach problems
confronted by human beings
A mental kill that incorporates a special view of human behaviour
Arises because of:
> Unlimited desires
> Limited resources to satisfy those desires
Unlimited desires includes both material and non material wants: love,
health, friends, sex, vacations, ect.
-There are limited resources to satisfy all these wants (including time)
-People trade goods and services: they exchange those things they have in
abundance for those they don't have and want to max satisfaction
Thinking about values
-Economics use the "amoral approach" to analyzing issues and problems
The amoral approach is devoid of our own values
The economist tries to understand the behavior of others, given their own
Economists use theory to explain the world around them
A theory is a simplification of generalization that captures a reality. i.e
When the price of the products falls, generally, demand inc.
We will use theory (or models) to explain much of human behaviour
Acceptability?; we accept those theories that explain and predict
Thinking about people
Focus is the individual
individual has values, makes choices, and takes action
Social goals reflect individual values; society is not independent from
individuals thinking about rationality
Human beings act with a purpose; we assume they know what they are
cost/ benefit analysis
"rational addiction"
Any decision you make can be considered rational
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Purpose is to improve their lot: to maximize satisfaction
But in trying to maximize satisfaction there are constraints: environmental,
social, and biological
Many social scientists believe environment determines human behavior.
Rather than influences it (what economists maintain)
Rationality: (cost benefit analysis) does not imply selfishness
Rationality postulates allows construction of powerful theories in
Individuals prefer more to less of what they want. They are insatiable
Problem of uncertainty in trying to max. satisfaction: people choose an
action each believes will give greatest satisfaction, but choices may
not work out. i.e choosing a field job specialization may later prove to
be unwise because there are no jobs
People have desires
Scarcity of means in relate to desires creates economic problems
desires may be material or not
People know what they want and try to fulfill as many desires as possible
subject to constraints
As individuals try to max. satisfaction sub. to constraints, choices may not
work out
Thinking about cost
Choosing one alternative means giving up another alternative cost
Opportunity cost
Cost is a constraint on action
Nothing is for free: Everything has a cost "there is not free lunch"
Money is just one way of measuring cost
Why do poor people ride busses and rich people fly?
> Time is more valuable (rich people) because they earn more per hour
Emotional cost
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Thinking about the Margin of Cost
It is additional cost "marginal cost" that is important when we consider our
course of action
Economists don't think in absolute terms. Actions depend on extra costs
and benefits
Cost rise as production of any good or service rises. But you also need
incentives to elicit more supply
Law of Demand
Strongest possible predictive statement about human behavior
1 reason the curve slopes downward is due to the "Law of Diminishing
Marginal Utility" (DMU) The more of a product is consumed, the
utility (pleasure) from additional units falls
DMU is one of the main reason for insatiability: people need new and
better things
There are many buyers and sellers in markets with diverse wants the
abilities to provide goods and services
Markets allow exchange so people can get what they most value at least
possible cost by training for those things they have and value less
Markets create competition
Individuals consume a product or a serve until MC=MB
If MB>MC can increase satisfaction by incorporating consumption
If MB<MC decrease consuption
Sex an exchange
A person can exchange sex for security, clothes, kindness, marriage, ect.
Since supply of sex is upward sloping (meaning?) we need to pay more to
get more sex
In u.s coital frequency peaks in 2nd week of February- Valentine's Day
Sex as a Market Product
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